A separately managed account (SMA) is a dedicated investment portfolio managed by a general partner or investment manager on behalf of a single limited partner. Unlike a commingled fund where dozens of investors pool capital under standardized terms, an SMA gives one investor a bespoke mandate with customized strategy parameters, fee arrangements, and direct ownership of the underlying assets.
Why Investors Use SMAs
The appeal is control and customization. Large institutional investors, particularly sovereign wealth funds, public pensions, and major endowments, often have specific requirements that a commingled fund cannot accommodate. An SMA allows the investor to define investment guidelines (sector restrictions, geography limits, ESG screens), negotiate fee structures that reflect the size of their commitment, and maintain full transparency into every position.
Direct asset ownership is another driver. In an SMA, the investor holds the assets in their own account rather than owning a partnership interest in a fund that holds the assets. This simplifies regulatory reporting, provides cleaner audit trails, and can offer tax advantages depending on the investor’s structure and jurisdiction.
How SMAs Work in Practice
The GP and the investor negotiate an investment management agreement (IMA) that functions similarly to a limited partnership agreement but is bilateral. The IMA defines the investment strategy, permitted asset types, concentration limits, leverage parameters, fee schedule, reporting requirements, and termination provisions.
Capital deployment follows the same general rhythm as a commingled fund. The GP sources opportunities, conducts diligence, and invests capital within the parameters of the mandate. The difference is that the GP is answering to one investor rather than a broad LP base, which often means faster decision-making and more direct communication.
Fund administration for SMAs is handled separately from the manager’s commingled vehicles. The administrator maintains dedicated books, produces investor-specific reporting, and handles capital call and distribution mechanics for the single account.
Economics
SMA fee structures are almost always more favorable to the investor than commingled fund terms. The management fee is typically lower, often 50-100 basis points below the flagship fund rate, reflecting the size of the commitment and the reduced marketing and investor relations burden. Carried interest rates may also be negotiated down, or structured with higher hurdle rates or modified distribution waterfalls.
The tradeoff for the manager is guaranteed, sticky capital. An SMA commitment of $300 million from a pension fund provides a durable revenue base that supports headcount and infrastructure in ways that uncertain fundraising for a commingled vehicle cannot.
When SMAs Make Sense
For investors, an SMA makes sense when the commitment size justifies the fixed costs and when the investor needs customization that a commingled fund cannot provide. The threshold is typically $100 million or more, though it varies by strategy.
For managers, SMAs make sense when a large institutional investor is willing to commit meaningful capital on a dedicated basis, especially if the mandate aligns with the firm’s existing strategy. The risk is concentration: if the SMA represents a significant share of the firm’s AUM, losing that single relationship can be destabilizing.
SMAs vs. Co-Investments
SMAs and co-investments serve different purposes. A co-investment is participation in a specific deal alongside a commingled fund. An SMA is a standing mandate to invest across multiple deals over time. Some SMA agreements include co-investment provisions, giving the SMA investor priority access to deal-by-deal opportunities beyond the account’s allocated capital.
Frequently Asked Questions
What is the difference between an SMA and a commingled fund?
In a commingled fund, multiple LPs pool their capital and invest together under standardized terms. In an SMA, a single investor commits capital to a dedicated account with customized investment guidelines, fee structures, and reporting. The SMA investor has direct ownership of the underlying assets and full transparency into the portfolio, which is not always available in a commingled vehicle.
What size commitment typically justifies an SMA?
Most managers require a minimum commitment of $100 million to $500 million for an SMA, though thresholds vary by strategy and manager. The fixed costs of maintaining a dedicated account (legal, administration, reporting, compliance) are the same regardless of size, so the commitment needs to be large enough to absorb those costs without meaningful return drag. Some large institutional investors run SMAs with commitments exceeding $1 billion.
Can an SMA investor co-invest alongside the manager's commingled fund?
Yes, and this is common. SMA investors often negotiate co-investment rights as part of their mandate, giving them the ability to increase exposure to specific deals beyond what the SMA allocates. Some SMA agreements require the manager to offer co-investment opportunities before making them available to other investors.
